Enzon asset sale should trigger put option for 4% convertibles, Bank of America Merrill Lynch says

By Rebecca Melvin

New York, Nov. 10 - Enzon Pharmaceuticals Inc.'s announced sale of its specialty pharmaceutical business should constitute a fundamental change for the company's 4% convertibles due 2013, based on the interpretation of a Bank of America Merrill Lynch convertibles analyst.

Based on the original and supplemental indentures, "we think that as long as the announced asset sale constitutes a sale of 'all or substantially all' of Enzon's assets under Delaware law, it falls under the definition of 'fundamental change,'" analyst Tatyana Hube wrote in a note published Tuesday.

In Enzon's announcement, the company explicitly stated that the transaction may be deemed to constitute a sale of "all or substantially all" of Enzon's assets under Delaware law and, therefore, is conditioned upon the approval of the holders of a majority of Enzon's outstanding shares of common stock.

"We interpret this pronouncement as a confirmation that the company views the sale as a 'fundamental change,' although the company would have to make an explicit statement that the 'fundamental change' took place when the sale is complete," Hube said in the note.

If the fundamental change is triggered, the 4% convertible holders have a right to put the bonds back to the company at par as long as Enzon common stock trades below $10.03 at the time of sale.

Alternatively, convertible holders would have a right to submit the notes for conversion into Enzon shares at an enhanced conversion ratio during a 45-calendar day window following the fundamental change date or until the second business day preceding the "fundamental change" put date, whichever makes for a shorter period.

The exact number of additional shares issuable upon conversion will depend on the exact date of the fundamental change occurring and the five-trading day average closing stock price immediately before the fundamental change date.

Assuming the sale occurs in the middle of the first quarter of 2010 (Feb. 15) and using the recent trading Enzon stock price of $9.90, Hube estimates the number of additional shares would be about 12, for a total enhanced conversion ratio of 116.712 and a conversion value of about 115.5.

Bridgewater, N.J.-based Enzon announced Monday that it is selling its specialty pharmaceutical business to an Italian company for $300 million upfront plus as much as $27 million for milestone payments.

Enzon's 4% convertibles added on the news, trading at 113 versus a share price of $9.40 on Monday, compared with a previous level of 109, according to a market source.

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